A few months ago when I decided I was (finally) ready to move to a new state, I started the process of house shopping.
I was excited to go house shopping this time around because I knew I’d have a lot more to choose from. This is for a couple of reasons.
First, the new city I’d be living in is much larger with many more houses to look at. The other big reason was because my budget for a house was higher than the last time around.
But, while house shopping can be fun, I also realized how easy it would be to get carried away and end up with more house than I could comfortably afford.
This is called being house poor.
What Does it Mean to be House Poor?
There are lots of definitions of what it means to be house poor. Some sites will suggest that being house poor means you house payment, or rent, is more than a certain percentage of your monthly income. Usually the suggestion is that anything over 30-40% of your monthly income will make you house poor. (30% is the number the US Census Bureau has been suggesting for years!)
Tip: Use the Affordability Calculator from PenFed on this page to see how much you can afford, what your payment could be, and estimate your closing costs.
Personally, I define house poor differently. Yes, those numbers are a good starting point to look at if you want to avoid being house poor, but more importantly to me is just being able to comfortably afford my house payment and my lifestyle, no matter what percentage of my income it ends up taking.
How to Avoid Being House Poor
I used to be house poor and I never want to go back, so I did everything I could to avoid it this time around.
Here are 4 things you can do to avoid being house poor when you buy a house.
1. Determine Your Own House Budget
One of the first things that happens when you get ready to buy a home is that your real estate agent will ask your budget for house shopping. Usually they’ll want to know how much you pre-qualified or pre-approved for from your lender so they can show you homes that are around or under your limit.
However, sticking to what the lender says you can afford may lead you to being house poor.
Although you can afford a home on paper, you have to decide for yourself if it’s really within your budget. After all, your lender doesn’t know about or take into account your other financial goals.
This is why I suggest you spend some time looking to see what it really costs to get what you want in a home. Get a feel for the market to help you decide what your house budget should really be.
2. Stick to Your Guns
Now that you have your own house budget in mind, it’s up to you if you want to tell your real estate agent the amount you’ve been pre-approved for, or the amount that you’ve set as your own house budget.
(Assuming that amount you’ve set is less than what you’ve been approved for that is! If you want to spend more than you were approved for, tough luck! You’ll have to settle for less or wait to buy until you have more savings, better credit, etc.)
At first I told my real estate agent what my budget was rather than the amount I was pre-approved for. I was pre-approved for over $100,000 more than I wanted to spend on a home.
Luckily, I knew what my own budget for a house looked like and I insisted that we stick to it when looking a homes.
Why I Wanted to Spend Less
There are several reasons why I didn’t want to spend the maximum amount I was pre-approved for.
First, as a single person, there’s absolutely no reason I need a gigantic home. The home I ended up with is comparable in size to my previous home and it still a bit bigger than I really “need”.
Second, I want to do more with my money than pay my monthly mortgage payment. I have other goals to travel, pay off debt, build savings, etc., which is why I wanted to spend less than I was approved for on my house.
Third, I was able to easily find houses that met my wish list and my budget. I wanted a home that needed a few updates/improvements. Not too many that it wasn’t livable, of course, but part of the beauty of a home that’s not 100% done is that you can put your own personal touch on it, AND it will likely give you some instant equity as you work to improve it.
3. Budget and Save for More Than Your Monthly Payment
There’s more to owning a home than paying the monthly payment.
As a homeowner, you are responsible for home repairs, upgrades, and maintenance. All of these things cost money, even if you DIY as much of it as you can.
Many homeowners forget to take into account all of these expenses, or they under-budget for how much they’ll really cost. In fact, this is one mistake I made when I bought my first house!
Now I know that it’s extra important to have an emergency fund as a homeowner. You need to plan for more than the monthly payment on your home.
4. Avoid Lifestyle Inflation
Another huge mistake I made when I bought my first house was giving in to lifestyle inflation.
Lifestyle inflation isn’t always a bad thing, but when you do it at the same time as buying a house and increasing your monthly payment, it can be a recipe for disaster.
This time I knew to prepare for my monthly payment to increase. So, I didn’t go out and do or buy other things that would also increase my monthly expenses.
My experience with buying a house was much better this time around. I knew what to expect and what to avoid. That doesn’t mean the entire process went smoothly, it didn’t! (Hello, there was some drama!) But at least I didn’t repeat the same mistakes as last time.
When you bought a house were you house poor? What other tips can you think of to avoid being house poor?
This post is in collaboration with PenFed Credit Union. The views expressed in the article are the views of the author and do not necessarily reflect the views of Pentagon Federal Credit Union. PenFed Credit Union is an Equal Housing Lender and is federally insured by the NCUA.